I am a software entrepreneur who is currently an investor and board member in three startup companies. I have a B.S. in mechanical engineering. I was born in 1948. This chapter of my life is about trying to help people make their dreams come true. I started writing about economics because I hate the way that our dysfunctional economy is crushing the dreams of so many people. Young people are delaying getting married and having children because of unstable jobs and incomes. It doesn't have to be this way, and I want to contribute to solving the problem. I believe that prosperity is possible.

Thomas Piketty Gets The Numbers Wrong

Given the excitement that Thomas Piketty’s new book, Capital in the Twenty-First Century, has stirred up within the political left, the French economist probably should have titled it Fifty Shades of Inequality.

In Capital, Piketty presents a painstakingly researched case for doing what progressives ranging from Paul Krugman to Barack Obama want to do anyway, which is to raise taxes and expand the power and reach of government. Unfortunately for liberals, Piketty gets almost everything wrong, starting with the numbers.

Piketty claims that capitalism is in crisis, because the importance of capital in our economy is growing, the “Top 10%” owns most (70%) of it, and the “Bottom 50%” owns almost none (5%) of it. However Piketty’s numbers ignore the capitalized value of Social Security, Medicare, and our other welfare state programs. These programs are huge, and they disproportionately benefit the “Bottom 50%.”

Social Security Card (Photo credit: 401(K) 2013)

Social Security and Medicare are “pay as you go” social programs (which Piketty calls “PAYGO”). While Social Security and Medicare may not add anything to the physical capital of the economy as a whole, from the point of view of the individuals enrolled in the programs, they represent capital. Specifically, the Social Security and Medicare contributions function as forced savings, and the benefits function as annuities. And, Piketty certainly counts annuities owned by “the rich” as part of their wealth.

Social Security and Medicare are structured such that the capital accumulation from the forced savings of the lower income classes is heavily augmented by subsidies paid for by the higher income classes.

The ultimate example of this might be the case of the first Social Security benefits recipient, Ida May Fuller, who was definitely not in the “Top 10%.”

Ms. Fuller received about $180,000 in Social Security benefits, in return for a bit more than $400 in contributions (both numbers in today’s dollars). And, she also received 10 years of Medicare coverage for nothing.

Living requires income. In Piketty’s model, there are only two kinds of income: income from labor, and income from capital. Because Ms. Fuller didn’t work for the last 35 years of her life, she must have lived off income from capital. Ms. Fuller must therefore have owned significant capital (in the form of her claim on the Social Security Administration) when she retired in 1939. Because Piketty’s wealth distribution numbers do not take this form of capital into account, they are simply wrong.

But wait! Social programs are just promises by the government to pay, and they could be repudiated at any time.

Yes, but government bonds are also nothing more than government promises to pay, and Piketty counts them as private wealth. Government bonds can be (and have been) repudiated, both directly (Argentina, Greece) and via inflation (almost everywhere).

Because high earners receive a return on their contributions that is lower than the interest rate on federal debt, the entire “unfunded liabilities” of Social Security and Medicare must logically arise from the benefits promised to the “Bottom 50%.” Let’s see how taking these unfunded liabilities into account would affect Piketty’s numbers.

Piketty estimates that, in 2010, the U.S. had total national wealth of about $54 trillion. The “Top 10%” owned 70% of this, the “middle class” (the next 40%) held 25% of the total, and the “Bottom 50%” owned 5%.

If we assume that the (75-year) unfunded liabilities of Social Security and Medicare ($9.6 trillion as of 2010) will ultimately be dealt by taxing “the rich” (i.e., the “Top 10%”), then the true U.S. wealth distribution in 2010 was actually much different than the one that Piketty describes.

After adjustment for the capitalized value of Social Security and Medicare, in 2010, the “Top 10%” actually owned 52.2% of national wealth, not much more than the 50% observed for this group in 1970s – 1980s Scandinavia, which was the society with the lowest inequality that Piketty has ever found. And, the “Bottom 50%” really held 22.8% of total wealth, close to the 25% that Piketty believes would pertain in an “Ideal Society.” (See Table 7.2 in Capital.)

But wait! There’s more! Specifically, there is a lot more to the U.S. welfare state (which Piketty calls “the social state”) than just Social Security and Medicare.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

Comments

This review is a hot mess. Piketty is writing about inequality. You almost never mention inequality, except when you mention that this is Piketty’s subject. Why do you try to critique his study of inequality without talking about inequality? My guess is because inequality suits your needs and desires, makes you feel special and important (because you’re on the up side of inequality), and you accept massive inequality as a wonderful part of modern life.

Let’s deal with your need to constantly try to sound superior to someone who real economists (those who have studied economics) admit is smart, talented, and well researched. You refer to him, variously, as having bought into a superstition, being blind to his own data, and as an idiot (“Piketty’s Idiocy Lightening Round” — this was particularly guffaw worthy, so smart and snide, wink, wink).

The next part of this smug superiority complex of yours is in how you reference the “Declaration of the Rights of Man and the Citizen. Do you realize this document was written in French (as the “Déclaration des droits de l’homme et du citoyen”), and you’re referencing a translation (without letting us know who translated it)? Your “sic” references are out of line; choose a better translation next time. The same is true for your word-picking over the alleged discrepancy between Piketty’s summary of the Declaration and its (translated) wording. You also understand that Piketty’s book has also been translated from French, don’t you? That again, in a global world, means you don’t get to critique it word by word (if you do you’re critiquing the translator, not the author). If you want to do that, read the French and critique the French (in French). Otherwise, go with the clear overall meaning that arises from the overall text and take on the substance, not the form.

A suggestion: lay off the personal/smug attacks and insults next time you’re thinking about writing a response to a serious piece of economic research. The insults make you look petty and threatened by real facts (and make me pretty much discount anything you say because you can’t say it without a snide attack on the subject of your response).

Now let’s move on to this little gem:

“If America’s welfare population (along with their lifestyles) were put in a time machine and sent back to the France of 1870, they would be viewed by the ordinary people of that time as a strange new aristocracy.”

Would you care to compare the wealthy of that period with the wealthy of today? I didn’t think so. I bet you would claim you can’t compare the wealthy of that time with the wealthy of today. It’s just apples and oranges. Why do you get to compare the poorest classes? Because it fits so nicely into your little piece of sophistry, that’s why. It makes for good media quotes. But it’s all sound and fury, signifying nothing.

Back to my main critique of your “response”: If you want to critique Piketty’s attack on inequality, how about talking about inequality next time? And maybe get the advice of a real economist before you do it.

Allow me to compare the wealthy of the 1870s to the wealthy of today. The wealthy then lived a globe-trotting lifestyle, they drank champagne like water, they enjoyed the finest food and lived in large houses. None of this has changed. Even life expectancy and educational attainment among the top 10% haven’t changed that much.

Compare to the poor: international or even regional travel was unthinkable, disease and malnutrition were taken for granted, illiteracy was widespread.

It should be obvious from recent history that government can only create an illusion of “equality” by borrowing money to fund endless give aways. That is, the electorate already votes to borrow money from their own children to receive give aways today, rather than assume responsibility for their own welfare within the constraints of their productive limits. Mr. Piketty’s tax prescriptions are known to be insufficient to pay for our current annual deficits, let alone pay off our existing debt, and fail to address the loss of productive energy incented by fixing limits on income and wealth. We are therefore left with the reality that electing Pikettys who promise to maintain and expand the give aways is a dead end that penalizes our children and all future generations. Rather than face reality, the Pikettys promote another fantasy social prescription that will only guarantee a dystopian future. Interestingly, the nexus of their thought process lies in envy and resentment rationalized as pursuit of justice and equality(where have we seen this before?). It is up to those of us with a positive view of human capacity to promote individual freedom, responsibility, and opportunity, and to bury this Piketty nonsense in the scrapheap of history.

I am no economist…but with regards to the Social Security and Medicare impact… perhaps Piketty held constant the capital impact of Social Security and Medicare in his discussion….as the top 10% ALSO receive this benefit too…regardless of their income or wealth status. A universal benefit for all, although you could argue higher income folks potentially contribute more to the SS system over their lifetimes….but maybe some don’t. Skindoggy

Actually, Skindoggy, it’s worse than that. You don’t pay anything additional into social security once your income reaches $117,000. That means it’s a tax on low and middle class earners, not a tax on the wealthy (who, as you note, also get its benefits for the amounts they contribute in the lower ranges of their income). Notice Woodhill fails to mention this; maybe he doesn’t know it (he should follow Piketty’s lead and do some actual research).

What your point ? Are you suggesting that a billiinaire paying 30% of his income in taxes is somehow more virtuous than someone on 117k paying 30% of theirs simply because its more? I love this continuing BS espoused by the stooges of the super wealthy that somehow we must be enthralled to the rich because without them there wouldnt be enough rax revenue to sustain society.

What a load of horse manure. Believe that youll believe anything.

What they are trying to do in the UK is raise far higher the earnings threshold at which you pay tax rather than try to increase real earnings. This is a huge tgreat to democracy.

No taxation without representation, right? But guess what – if you dont pay tax, your demand for equal representation starts to disappear pretty fast. And if your in the top 1% and your paying vast amounts of tax (well, still only a small % of your total wealth – you’ll still have 6 houses and 2 jets), then the government dances to whatever tune you play.

“In Piketty’s world, it would be a bad thing if someone were to develop a drug that cured Alzheimer’s. This is because that person would certainly become a multi-billionaire, and that would increase inequality.”

You what?

I had my concerns about this right-wing rant, and was ready to make a constructive rebuttal. Then I read the statement above and stopped reading. This guy is obviously off his trolley.